威廉斯 (WMB) 2002 Q3 法說會逐字稿

Good day and welcome to the Williams Companies' third quarter conference call. Today's call is being recorded. At this time, for opening remark and introductions, I'd like to turn the call over to the President, Chairman, and Chief Executive Officer, Mr. Steve Malcolm. Please go ahead, sir.

Thank you. Good morning and welcome to Williams' third quarter analysts' call, and as always, we sincerely appreciate your interest in our company.

Although we're disappointed in the earnings release this morning, we do see clear positives in the results reported. As our business unit leaders will describe in more detail later in the call, our core asset base businesses continue to be very profitable, showing steady improvement quarter over quarter, and in fact, I think those businesses recorded 100% increases in terms of year over year profitability. However, our EM&T losses continued in this quarter, primarily due to reduced market liquidity, our own limited credit capacity, narrow spark spreads and counter party credit degradation.

Before I talk in more detail about our individual businesses, I'd like to talk a little bit about the very significant progress that we have achieved during the quarter relative to our priorities.

First, with respect to asset sales that have occurred since early September. We did close on Cove Point, which brought in $217 million. We sold our 27% interest in our Lithuanian refinery for $160 million, and sold our 14.6% interest in Alliance Pipeline for $173 million.

In addition, we announced that we had reached definitive agreements to sell Central Pipeline for $550 million, and I'm pleased to announce that that closing is scheduled for tomorrow. As well, Travel Centers, we announced that sale for $190 million, and expect that that transaction will close within the next 60 days. As well, the company sold its WCG claims to Acadia for $180 million, as well as associated office building and related assets for $145 million in notes.

In addition to those asset sales, and good news with respect to WCG, earlier this week we did announce a comprehensive settlement with California that resolves contract disputes outstanding litigation and civil claims related to the California power market. I believe very strongly that this is a win-win settlement. It's good for Williams, it's good for the state of California, and I believe it's good for the industry. And I want to congratulate Bill Hobbs and his team on a tremendous achievement there.

For Williams specifically, the settlement does a number of things. It preserves the substantial value that is embedded in our original contract. Obviously, it greatly reduces the uncertainty surrounding our contract, and stabilizes our portfolio value as it relates to the West. It clears the way for us to monetize all, or a portion, of the value in our California portfolio. It ends challenges at FERC to the existing CDWR contract, and, probably most importantly, it preserves an important relationship with a very important customer, the state of California.

But there is much more work to be done with respect to asset sales. We continue to move and negotiate on the sale of our refineries and in anticipation of questions that you may have, given that we're in the process of finalizing negotiations on the sale of our refineries, it would be inappropriate at this time to be specific about the purchase prices. So, all I can say is we're making progress with respect to the sale of refineries, and we expect that we will have definitive agreements done before the end of the year. As well, we continue to work on the sale of Bioenergy, the western Canadian Midstream assets, the ethylene plant and related pipeline, and soda-ash.

Another one of our priorities, clearly, is to resolve the marketing and trading book in some manner, either through the sale of the book or through some kind of joint venture. We continue to have negotiations with respect to that issue. I'm not prepared to announce anything today, but we continue to negotiate long and hard with respect to that very important issue.

Turning to guidance for 2002, the guidance is unchanged. I think in terms of recurring core business profitability, what we had talked about earlier was something in the range of 1.4 to $1.5 billion for 2002, and as I said, guidance is unchanged. Also, in terms of liquidity, we're in good shape, and the picture is unchanged with respect to liquidity, as well.

Looking at guidance for 2003, again, looking at our core businesses and just to review, when I talk about core businesses I'm speaking of our Interstate Natural Gas Pipeline business, exploration production, Midstream, and our interest in Williams Energy Partners. The range we believe will be applicable for 2003 is something in the 1.1 to $1.3 billion range. That's lower than 2002 for obvious reasons, the assets that we have been successful in selling to date and those that we believe we'll sell before the end of the year. I think the assets that probably have the greatest impact are Jonah and Anadarko, which we sold in late July.

In 2003, we are absolutely committed to living within our means, and that means that we will be looking at capital projects that can be supported only from cash flow from operations, and as we look at the year it appears that capital dollars that will be available to be spent during the year will be somewhere in the 700 to $800 million range.

As well, when you look at forecasts of available cash for 2003, again, cash from operations is about a billion-seven, and that gives us then the capital we have to spend of somewhere between 700 and $800 million.

We are intending to live within our means. We have a clear game plan that allows us, as a result of the cash flow from operations, additional asset sales and/or dollars we may get from selling pieces of book that will allow us to pay off the debt maturities that will be coming due in 2003. And importantly, the plan does not envision us having access to capital markets during the year.

I'd like now to talk for a minute about our new organizational structure. We have made some changes. I think we recognize very clearly what our priorities are today; selling assets, reaching some resolution to the book, right-sizing our organization, and in order to ensure that we are focused on those priorities, we have identified Phil Wright as our Chief Reorganization Officer.

He is, Restructuring Officer, he is moving from his previous post of President of Williams Energy Services. We've eliminated the organization around Energy Services and have flattened the organization. And now have Ralph Hill, who heads up E&P, and Alan Armstrong, who heads up Midstream, reporting directly to me.

So again, Phil Wright is now our Chief Restructuring Officer, he is focused on our most important priorities, focused on completing our asset sales, being the chief negotiator with respect to resolving our book, driving change throughout the organization in terms of restructuring, and pursuing costs reductions.

With that, I would like to turn it over to our business unit leaders to very briefly give you some flavor as to what is going on in their respective businesses in the third quarter, and looking ahead to 2003.

So Doug Whisenant will start. Of course, Doug heads up our Interstate Natural Gas Pipeline group.

The release for Gas Pipeline profit, I'd like to take that and focus on the contributions of Williams core pipeline assets of Northwest Pipeline, Texas Gas, Transco, plus our 50% interest in Gulfstream.

Looking at that, the operating profit for the quarter totaled 183 million, versus 95 million in 2001. Only the earnings of Gulfstream were lower than last year.

Major earnings contributions came as a result of FERC's approval of rate settlements at Texas Gas and Transco. Settlement rates at Texas Gas went into effect on August 1st, and Texas Gas rate reserve was adjusted, adding $16 million to current quarter operating profit. Approximately 13 million of this rate reserve reversal was related to prior years. We're not required to make a new rate filing on Texas Gas, until November 2005.

Settlement rates at Transco went into effect on October 1st, and Transco's rate reserve was also adjusted, adding 28 million to the current quarter operating profit, 11 million of this rate reserve reversal was related to prior years.

We're not required to make a new rate filing at Transco until September, 2006. Two expansions on our Transco system contributed almost $5 million each, of our $10 million total, to the current quarter's operating profit compared to last year. Market Link, which went into service late last year, has contributed almost 15 million year-to-date, and Sundance, which went into service in May, has contributed almost $8 million to year-to-date operate is profit.

Earlier this month, we completed three more expansions that will increase operating profit and cash flows in the fourth quarter and forward. Market Link Two and Light East expansions were placed into service on November 1st, earlier this month, adding $260 million decatherms of capacity into the pipeline constraint New York City market. The combined first-year operating profit contribution of these expansions will be over 19 million. The Grays Harbor lateral was placed into service on Northwest Pipeline earlier this month as well, providing incremental first-year operating profit of $10 million.

Next year, we will be completing several other expansions; Momentum, Evergreen, Trenton Woodbury, that are fully contracted, and together will add 61 million per year to Gas Pipeline's operating profit, once put into service later next year. We're working with shippers to possibly defer a portion of these expansions until 2004, conserving cash for us and better matching the timing of the in-service date of these expansions to the shipper's needs.

We will also be completing two general expansions of Northwest Pipeline, designed to provide existing shippers with more reliable access to Rocky Mountain and Alberta gas supplies. These expansions will add 28 million to operating profit, when they are rolled into existing rates, once Northwest Pipeline files its next rate increase, probably effective next November.

In total, Gas Pipeline's 2002 capital expenditures total $972 million, including 702 million of expansion. 2003 capital expenditures include 403 million of expansion. We may defer up to 100 million of these expansion expenditures, based on discussions we're now having with our shippers, as I previously mentioned. Steve, that's what I have.

Thank you, Doug. And now let's hear from Ralph Hill on Exploration and Production.

Thank you, Steve.

I'm pleased to report the E&P employees continue to keep their eye on the ball and are delivering record production results while we maintain our top quartile industry-leading positions in the efficiency areas of lease operating expenses, G&A and finding costs. And just to remind our listener today, the E&P group, according to the latest Oil and Gas Journal 200 rankings, is now the number 8 E&P company in terms of natural gas reserves.

After the Barrett acquisition last year we embarked on a program to sell off non core assets and have essentially accomplished this. These are assets that didn't fit our core expertise of basin centered tight sand gas development and coal bed methane development.

Also, as you know, we sold our Jonah properties in July. All tolled, we have sold off approximately 135 million cubic feet a day of production, approximately 400 Bcf of crude reserves, and raised $480 million, generating a book gain of $140 million. This is an area where we have truly been able to buy low and sell high.

I remind the audience of this because, even after these sales, our production averaged 573 million cubic feet a day in the third quarter, which is above the level we were producing after the combination of our volumes with the Barrett volumes. This is a testament to our successful low-risk efficient development drilling program, and to the strength of the core assets we have kept in our portfolio, which fit our expertise, once again, of basin centered tight sand gas development and coal bed methane development.

Some highlights include: The Peonce (phonetic) volumes were 217 million cubic feet a day, that's up 37% from a year ago. In the third quarter we drilled 34 wells, 99 year-to-date. Powder River Basin, our operated volumes were up 320 million -- up to 320 million cubic feet a day, that's up 39% over a year ago, essentially a $100 million a day of increased production in one year.

We drilled 256 wells in the third quarter, 861 wells year-to-date. In San Juan Basin, our volumes were up 5%, with operated volumes now 130 million cubic feet a day, and non-operated volumes of 75 million cubic feet a day.

On the operated side we drilled 11 wells, 24 year-to-date. Our (indiscernible) coal bed methane volumes have doubled to an operated volume level of 23 million cubic feet from a year ago. We drilled 14 wells in the third quarter, and 44 year-to-date. In the Raton Basin our operated volumes have also doubled to 28 million cubic feet a day from a year ago and we drilled 6 wells in the third quarter, 31 year-to-date.

Important to us with all this activity, our lease operated expense remains in an industry-leading position of 37.3 cents per MCF. We believe the industry average to be around 50 to 55 cents per MCF, so our 37 cents is clearly a leadership position. Also our fully loaded G&A costs remains in the top quartile at approximately 29 cents per MCF.

Looking at the pricing side and turning specifically to hedging, 85% of our third quarter volumes were hedged at a NYMEX price of approximately $4.25 per MMBTU. After adjusting for basis differentials, gathering, transportation and shrink, our net realized price is $3.35 per MMBTU. For the fourth quarter, 85% of our volumes are also hedged at a NYMEX price of approximately $4.30 per MMBTU.

For 2003, we're hedged 75 cents to 85%, at an -- 2003 and 2004, we're hedged 75% to 85%, at average NYMEX prices of $4.11 and $4.02, respectively, and the hedge percentages will depend on our capital expenditures.

For guidance to calculate a net realized price, I would deduct between 80 cents to a dollar, which reflects adjustments, again, for basis, gathering, transportation, and shrink, from the NYMEX price.

Please recall, approximately 90% of our capital is utilized for lower risk development drilling in our key basins. But on the exploratory side we've also had several successful step out exploratory wells, which focus on our expertise, again, of basin centered tight sand gas and coal bed methane gas in new areas where we can expand to. We look forward to providing more information to you as we finalize our testing production rates at these wells.

To summarize, I'd like to thank the E&P employees for keeping their eye on the ball, delivering record production while maintaining low cost, and doing their part to continue to strengthen Williams.

Thank you for the opportunity to share a few of our highlights. I'll turn it back to Steve.

Thank you very much, Ralph. Now let's turn it over to Alan Armstrong, who will talk a little bit about our Midstream business unit.

Thank you, Steve. Those are some tough acts to follow.

But Midstream had a very impressive quarter, as well. In fact, this was the best recurring quarter for our Midstream segment ever. This strong performance was in spite of losing our Seminole profits during the third quarter, which were sold in July, and historically have been a significant contributor to Midstream.

Our recurring operating profit of 115 million was nearly 60% over what was a strong third quarter in 2001. These major improvements came from higher liquid margins, higher gathering margins, and our deepwater investments beginning to take off.

Other positive notes include our increases in process volumes in Wyoming, where our newly constructed train at Echo Springs was loaded up with new volumes from strong growing programs in the Wamsutter area. Our customers drilling programs in this area will continue in 2003, and we continue to see strong demand for our gathering and processing service in all of our core basins.

Additionally, our teams have produced significant turnarounds in profitability on our discovery system and our Canadian Midstream business. Our continued strong focus on lowering the unit costs across our business has helped profitability across the board in all of our basins.

Looking forward, we're very excited about the continued growth in our volumes in our core businesses, and in our core basins. Wyoming, Four Corners and the Gulf of Mexico continue to show strong growth in drilling and our deepwater operating profit contributions should grow from 39 million in 2002 to 92 million in 2003, and then continue to 132 million in 2004. This assumes no new projects other than what is under construction today.

Another positive related to the deepwater growth is the fee-based nature of most of the profit. In other words, most of the business out there is just paid on per volume and we don't have gas to liquid margin risk on a majority of that business.

In summary, our past investments are really beginning to bear fruit, and we expect continued strong cash flows from our core assets, with much less capital required in 2003 and 2004 than we have in the prior years.

Thank you, Alan. Before I turn it over to Bill Hobbs and Andrew Sunderman, I just would like to make one comment. With respect to the recent DITF filing, ruling that rescinds 9810 and causes mark to market accounting to no longer apply to certain contracts, I know that many of are you looking for some guidance on the impact of that. But we will not be giving that today. I apologize for that. But we simply are not prepared to give any kind of range today.

So I'll just say that up front, before I turn it over to Bill and Andrew.

Thank you, Steve.

It's pointed out in Steve's opening comments, current market conditions and our current credit situation continue to cause our financial results to be negatively impacted. We are, as he also indicated, working diligently with Phil Wright and his team to sell certain aspects of the portfolio and assist him in the joint venture discussions that are ongoing.

We also remain committed to honoring our contracts and our customer commitments, and we continue to market the equity production that Ralph talked about earlier. Steve also touched on the EITF '02, '03, so I won't add any additional comments there, and that pretty much brings my piece to a close.

Thank you, Bill. And I believe that we are ready now for your questions.

Thank you, sir. Today's question and answer session will be conducted electronically. If you have a question, please signal by pressing star one on your touch-tone telephone. Please be sure your mute function is disengaged so your signal may reach our equipment.

We'll take our first question from Anatol Fagan with J.P. Morgan Please go ahead, sir.

Good morning. Couple quick questions. Can you give us some guidance on cap ex at the E&P and Midstream businesses to add up to the pipeline 400 million number?

Anatol, I -- we are continuing to grind through capital for 2003. What we do know is that we are going to be committed to living within our means, and that translates into 700 to $800 million of capital available for 2003. The breakout, we're not prepared to give you. We're doing some massaging of each of the business units today, and we have not reached any final conclusions. So I think the message is, we're going to live within our means, capital dollars, 700 to 800. The breakout by business unit we do not have available for you today.

Thank you, Steve. Can I ask Ralph a quick question on realized prices? They're up about 40 cents in the quarter. And I understood the second quarter numbers to be largely impacted by the basis differential, which had actually widened in the third quarter, and you guys came in about 40 cents better than the second quarter. Can you just discuss the dynamics there and what we can expect going forward?

Going forward, Anatol, I think that range I gave you is what you should look at, from off our NYMEX prices, and I need to go back and study the second quarter, if it's okay with you, I don't remember off the top of my head, and I can call you and give you that information. I can just say going forward, take the NYMEX prices that I gave you, and we're confident the range of 80 cents to a dollar will be what you'll see when you take off basis, transportation, gathering, and shrink.

Okay. Thank you, Ralph. We'll follow up later. And one last question, if you guys can give us some guidance on pension expenses, pension exposure? You were pretty underfunded end of '01, expect that things didn't get much better through the year. Can you give us some numbers around that for next year?

This is Jack. We're probably looking at an underfunded amount of someplace in the neighborhood of about 50 million right now, is our best guess.

Would that be -- an actual cash outlay that you would have to make to -- fund it?

Yes.

Okay. Thank you very much.

Thank you.

We'll take our next question from Will Mays Bank of America Securities.

Good morning.

Hi, Will.

Just a couple quick questions. On the R&M, on the writedown there in the business unit, are we still expecting a billion dollars there for the asset sale?

Well, I'm not -- again, we are in the process of negotiating definitive agreements. It would be inappropriate and foolish for me to tell you what to expect there. We are, again, we're in the final stages of those negotiations, Will, so I'm the not going to comment on that.

And just on asset sales in general for '03, could you remind us what the goal is?

The goal there will be something probably in the billion, to billion and a half range, Will. But will also be a function of, and dependent on, the recovery we get from selling pieces of our book.

Okay. And then just a follow-up on Anatol's question on the pension, that $50 million number, when do you have to make that payment?

December of this year.

December of this year, Will.

Okay, great. Thanks, guys, and good luck.

Okay.

We'll take our next question from John White with BMO Nesbitt Burns.

Good morning. I notice the long-term portion of the debt increased about 600 million, compared to the second quarter of '02. Is there one particular piece that counts for most of that increase?

I'm pretty sure it must be the accounting for the Berkshire loan, but I'll have to go back and check on that. I don't have that number or that reason right at hand.

Okay. I'll follow up with you. Thank you.

We'll take our next question from James Gibbons with J.P. Morgan.

Yes. It appears from a quick review of the balance sheet that non-trading related working capital was negative for the quarter, a portion of which was related to the posting, I gather, of cash deposits. And the change in working capital associated with trading, at least on a current basis, appeared to be positive. Could you please comment on those changes in working capital, and would you also please provide a current estimate of cash levels? Thank you.

This is Andrew. I'll take the question around the trading portfolio. I think your analysis is pretty much on point. Obviously, with the credit situation we were faced with, late second quarter, going into the third quarter, with the downgrade as we've communicated many times, we are required to post adequate assurances because of our credit rating, as well as additional margin, when our threshold was taken to zero. That did result in a significant use of working capital by the trading organization in the third quarter, which also resulted in the total cash flows from operations for the trading unit for the third quarter being negative as well.

Could you also please comment on the current cash position?

Sure. This is -- [ NOT UNDERSTANDABLE ] We reported in the Qs about $980 million of cash on hand at the end of the third quarter. That number, as of yesterday afternoon, is a billion-80. Million.

Thank you.

We go next to Ray Niles with Salomon Smith Barney.

Good morning. This is actually Brian Todao. I actually have a question with regards to the lawsuit we saw in marketing and trading this quarter. Could you just give a little more detail as to kind of the breakout of those? Was that all mark to market losses or was there some impact of trying to unwind the book over that period? Can you just bring out a little more color as to what caused those?

This is Andrew again. I'll try to provide a little more color around that. A significant piece of that loss will be related to the widening credit spreads, as well as the continued credit deterioration in the market. You're also, we noted that about 75 million dollars of that loss was as a result of the bid process that we went through and the information we received around certain of our portfolios, relative to the fair market value of those portfolios.

You obviously also had continuing G&A levels of somewhere between 60 and $70 million, and the rest of that would have been related primary to the open positions, primarily in gas that we've within unable to hedge. We were short a pretty significant position and we rolled into the time period where, as you saw gas prices rise in the third quarter, obviously, that affected that particular position, but a good piece of that has already rolled out of the books. So hopefully, on a go forward basis, I think you saw we said our bar was down significantly, so you should see the risks within the portfolio, we're not adding new deals, continuous to decline.

Okay. Just another question, is there new goal for debt to cap, structure? Is there new guidance there?

Jim, new goal on debt to cap ratio --?

Sure. Based on the way the banks calculate the number, we finished the quarter at about 65%, based on a more traditional GAAP analysis. It's about 69% on a debt to cap ratio.

As far as where we intend to drive the ratios, it's probably easier to talk about it in terms of the amount of deleveraging we continue to want to do. Our goal is to continue the deleveraging program to the tune of another couple billion dollars over the course of next year, taking the debt levels down from 13 billion dollars to closer to 11 billion dollars.

If you do the math and assume that the equity numbers stay roughly where they are today. Then you start to get down into the lower 60s, high 50s, by the time you get to the end of next year.

Okay. Thank you very much.

We go next to Carol Cole with Prudential Securities.

Good morning. I just wanted to -- quick question on E&P business, which is primarily, it sounds like, unconventional drilling tight sands and coal bed methane production. Can you give us an idea of how much the tax credits associated with that drilling generated in the quarter?

Carol, I'll give you a exact number but I don't think that's -- the drilling we're doing now, the tax credits were pre-1991 or 1992, and really I think it was insignificant, if any at all.

Okay. So if the senate can ever get together and come out with an energy bill and it has some language in there about tax credits, that would be incremental.

Yes. Our earnings are not bringing in any kind of significant tax credit stuff at all. It's all just drilling and our net realized price versus our expenses.

Okay. Great, thank you.

This is Jack. Let me clarify the question on the $600 million. What that is is a reclassification on some preferred interests and some leases that we had that were on the books and we were moving those into long-term debt. And it included East Breaks (phonetic), the Travel Centers, Castle, and The Peonce (phonetic).

Thank you, Jack, for that help. We're ready for the next question.

We'll take our next question from Kirk Lahner with Credit Suisse First Boston.

Good morning. Two questions, if I could, just want to follow up on some of the disclosures that will be in the 10-Q we'll see later today in terms of total values in the trading book right now, assets, liabilities, and net starting point for the new actions in that business, number one. And number two, if I could just, earlier this year, you had to speak about having no real clear view of what the rating agencies were asking for. Given the actions just recently in terms of the settlement in California and the DOJ and other asset sales, do you now have a clearer vision to talk about it terms of perhaps more favorable rating agencies treatment for the company?

This is Andrew, and I'll take the first part. In relation to the energy marketing and trading balance sheet, you'll continue to see the disclosures we've been putting out around changes in fair value for different reasons, such as, pieces that realize off. You'll also see the schedule we've continued to provide in our disclosures around changes in future cash flows and the timing of those cash flows.

I think what you'll see in the Q is that our net -- I don't have the gross asset liabilities but out net position will be somewhere in the 1.6 to 1.7 billion dollar range, and that reflects some of the earnings items we've talked about previously, as well as a significant piece of the portfolio that realized off, and a significant piece of the portfolio that was related to change in option premiums. So compared to the other quarters, you should see the exact net disclosures and our net book value should be somewhere around 1.6 to $1.7 billion.

Thank you. Just before the other question, if I could, follow up on that one, is there any direct connection between the change in the net asset value of about 500 million dollars from the June 30th balance sheet, connection to the $387 million loss in the E&P business? How should we analyze that?

I think when you look at one of the disclosures that we put in the 10Q called fair value of energy risk management trading, and we walked between the changes in the quarters, you're going to be able to clearly see which piece of the book changed as a result of realization, which would have been more of an accrual kind of earnings that would have been realized into cash, as well as which piece of the book changed as a result of a change in option premiums, which, as we talked about it the past, is also a cash only item. You'll see the amount of it that changed as a result of the changes in fair value, and you'll realize that that number, I think I've disclosed it, about 75 million of that was a result of our portfolio reduction around our bid process. And you'll be able to draw some good conclusions from that, I believe. It will be very well represented.

Great, we'll look forward to the disclosure.

Kirk, with respect to your first question, the ratings agencies, yes, clearly the California settlement was a positive development. And I'm sure viewed positively by the rating agencies. What we need to do is continue to make progress in terms of selling assets. We have made great progress to date, but we need to complete the effort and I believe selling the two refineries is important to that. So we need to get those sold.

And then secondly, we need to resolve the book in some manner, and I can assure you we're working very hard to do that. Jim or Jack -- have anything to add?

I think as far as actually setting goals and being able to determine what it's going to take, moving forward, I think Steve is right on as far as what has to be accomplished and then we can sit back and go through them. We continually dialogue with them.

They are focusing, as might be expected, on the liquidity and the cash from operations. And I think what we will end up doing is after the first of the year or after the -- this quarter, but then more importantly, probably after the fourth quarter, be able to get back with them and start to determine some goals to get us back our rating.

Okay. Thank you.

We'll take our next question from Bob Katoldo with Agone USA (phonetic).

Good morning. Just some further clarification around the settlement. You mentioned in your earnings release that it was subject to some additional approvals and due diligence by the California Attorney General. Is the settlement complete, does it indemnify you against all of the various investigations going on out in California? And any future investigations that may come up? Who the hell knows with these people will find and try to pursue. Help me understand, is this a finality? We won't see your name in the headlines related to these investigations anymore, et cetera?

In terms of the investigations that are ongoing by the State of California, once we get to December 15th, which is the closing date for the State Attorney General's due diligence, we'll have finality. And those settlements will -- those investigations will be closed. And all future investigations that you see related to the issues surrounding electricity and gas provided to California during the 2000 to 2002 time period, you won't see Williams' name associated with those. -- (indiscernible) due diligence period.

What is the due diligence -- what are they looking for, what are they looking at? Are they running it through the political process in California? Or is there a certain subject matter within the settlement there's concern over?

Over the past couple of years, we've been working with the State of California to show them all of the data associated with our business in California. And they're going to continue to look through that data and to have interviews with employees here at Williams.

I think that if you were listening to the media call from State of California earlier this week, you recall their statement that they don't expect to find anything new, that they've already done a very thorough investigation, so really what they're doing, over the next five weeks or so, is closing that up, conducting really some final interviews to assure themselves that they haven't missed anything previously.

Thank you very much.

We'll take our next question from Sebastian Dural with (indiscernible) Bank.

Hi. This is Shannon Batchman. I just wanted to go through a little bit on your debt maturity profile for next year. Are you assuming that you roll over to 364 day facility, as well as departure facility?

For planning purposes in terms of the way we're looking at next year, we're assuming we will not roll over the Barrett loan. We will roll over the existing financial arrangements we have with our banks, as far as the 364-day letter of credit facility that's sized at $400 million. The multi-year revolver would not be renewed next year. It runs until 2005.

As far as the remaining debt maturities for this year, we have about 566 million dollars left on maturities this year. The biggest single piece of that is the Castle structure deal that's classified as debt now. That is $200 million. We also have a $150 million TWC note, 6 1/2% note, that matures in this month. So those are the two biggest pieces of that $566 million that remains for this year. Also included in that, is the payoff of the Travel Center's note, which is about $109 million, which is the other biggest piece.

Going forward for 2003, it's a total of about $2 billion. That includes about a billion dollars on the Barrett loan, and the balance would be 2 amortizing payments on our Arctic Fox Snow Goose structured financing that will be paid off early next year, of $120 million apiece. We have a floating term note that we call our credit (indiscernible) floating note, for $400 million that matures next year. We have -- let's see if there's other big pieces here. There's a -- also a Fuji term loan, that was another structured financing that we did for another $125 million. We have a 6 and 8 Williams' holdings note for $175 million that matures next year. So it's just a whole list of things like that, I'm not sure how much detail you want, but it totals to about a little over $2 billion for 2003.

That's sufficient. On the term loan though, you've already paid down some of that already, the 400 million? From the asset sales, right?

The way our bank deal works is, as we make asset sales, what we call our progeny agreements, which are all of our structured debt deals that use our revolving credit facility document as their covenant package, do get paid down on a pro rata basis with asset sales. We share 50% of the dollars with our banks, and those structured deals, and yes, they do pay down as we make asset sales.

Thank you very much.

We go next to Matt Craig with Paine Webber.

Hi. Good operating quarter. Question: In the reduction of the value of the trading book, am I under the impression that it's because of the weakening counter-parties? Because I'm a little confused as to whether LCs are backing all your deals.

This is Andrew, I'll answer that. Basically, under fair value accounting, which is what we're on, even though we may have collateral backing, a good portion of the exposure to counter-parties from a cash standpoint and from a credit standpoint, from a fair value standpoint we still look at their bond spreads. And obviously, the third quarter, most of the bond spreads in this sector continue to deteriorate. So as a result of that we continue to take credit reserves to reflect that deterioration.

But that does not mean we do not have that credit back-stopped by margin agreements, (indiscernible) agreements, and letters of credit, but we do from a fair value standpoint continue to take increases or decreases in our credit reserve based upon their credit spread.

Thank you.

We go next to Jay Genello with UBS.

Steve, I fully appreciate your comment on the mark to market charge that's coming ahead. But it might be more useful to get everything out on the table now with some general parameters. Is it fair to say that this non-cash charge, or substantially non-cash charge, could be in the billion dollar range or something like that? Just any flavor on it, just to get it out on the table now so we don't see headlines down the road?

Jay, I'll let Andrew give some color, if he chooses to do so, but if he does not, then I will stand by the comment that I made to you earlier, and that is, we are not prepared today to give you that range. And I apologize for that. Perhaps there were some expectations that we would be able to do that today, but we are the not. Andrew? I think Andrew agrees with what I just said. I'm sorry.

That's fine. Thank you.

We'll take our next question from Paul Patterson with Glen Rock Associates.

Good morning, how are you?

Good.

What I wanted to ask was, how much of your tolling arrangements are in your trading book? Could you give us a dollar value as to what you guys are assigning to the tolling arrangements?

Every one of our tolling arrangements are in our trading book. They're all accounted for under fair value, and we do not disclose the breakdown of our fair value between different type of contracts. They are included in what you will see in the round up, around a billion-six to a billion-seven, total value net assets.

And they would be some subportion of that, is that correct?

They would be some subportion of that. That is correct.

Thank you.

Again, it is star one for questions, again star one for questions. We go next to Howard Comiskey with King Street Capital.

Hi, couple of questions for you. First of all, the cash position that you disclosed, in the Q it seems to be a little bit higher, it's a billion-293 and there seems to be restricted cash of close to 450 million dollars. That really doesn't jive with the information that you had presented, so I'm trying to under which is correct.

I believe the billion-292 was not at the end of the quarter, it was sometime after the close of the quarter. What I was giving you was the cash on hand at 9/30 and the current cash today.

That is the cash in the Q.

Sure? Well maybe I wrote down the wrong number.

Okay. What is the restricted cash for?

Restricted cash is for things like rate refunds, and things of that nature that we've carved out to make sure that that cash is earmarked for those sorts of things.

And in the June Q, the assets and liabilities associated with price risk management were substantially higher, on the order of about a billion dollars. Could you provide some clarity as to why the large reduction in both the assets, as well as the liabilities?

This is Andrew. I believe that if you look at the change in fair value for the current and long-term assets and liabilities, you'll come to a net change from about 2.2 billion to about the 1.6, 1.7 billion I've already talk about. There is a disclosure in our Q. I don't have the page number, but it's called fair value of energy risk management trading activity, which clearly walks between the things that were cash items that reduced because of realization and that were earnings items that reduced because of the change in the fair value of the portfolio.

Okay, It just seems as though it's a relatively large decline in the gross assets and liabilities, especially if you go back to the March quarter, where that number was north of $10 billion, at least on the asset side.

If you looking at growth, you know, first of all I would continue to state that obviously, net assets are the way we record revenues and also the preferred way the EITF has suggested we look at revenues from that standpoint.

But what you're going to see in the growth asset and growth liability, any changes on a growth basis are primarily going to be the result of new trading activity or market movement against that and you need to look at the net to analyze how that affects, because many times the liability moves in tandem with the assets.

I understand that. Just one last question. You had mentioned early on that you were using a number of 1.3 billion, was that cash from operations or EBIT, for fiscal year '03 guidance? I know you're not giving any real earnings guidance. But you did use that number and I just wanted to clarify whether or not that was cash from operations as from a balance -- from a cash flow perspective from --

That was -- if I'm understanding your question correctly, that was guidance for 2003 operating profits.

Okay.

And we said the range was between 1.1 to 1.3 billion dollars.

Okay. Great. Thank you.

We have time for one more question.

We'll take our final question from John Olson with Sanders Morris Harris.

Good morning, gentlemen. I wanted to have a follow-up on a few questions on the energy marketing and trading side with Andrew and Bill. First of all, Andrew, are you going to adopt -- go back to accrual accounting effective in the fourth quarter?

We have the option of adopting the new ETIF pronouncement, which is not really accrual accounting but it's '02-'03, and it basically talks about rescinding 9810. We have the option to adopt that at the start of the third quarter -- I'm sorry, at the start of the fourth quarter or the start of the first quarter of next year, and as part of our ongoing process of evaluating that very, very complex accounting pronouncement, we will make the determination around when to adopt, at that same time.

Can you figure out -- I think I asked this question the second quarter as well, your volumes are up magnificently, and energy marketing and trading and prudent product and power -- can you tell us separating out the accrual of accounting versus the value of the mark, or various marks in the quarter, as to whether you were profitable on an accrual accounting basis? Ignoring the marks.

We don't disclose accrual accounting numbers. I think that the disclosure I'll continue to talk about, around changes in the value of the portfolio from a balance sheet standpoint, should give you the ability to start, and if you want to walk through that, I'll take that call off line at a later date.

Okay. Le me also ask you about the SG&A expenses in the quarter. Looks like you guys were fairly flat, 65 million, third quarter versus 63 million in the second quarter. Where are you in terms of downsizing the business and where is that number going to, what is that going to look like going into '03?

We have downsized really since June to date, probably a little over 400 employees or about half of our staff. And would expect probably some further downsizing between now and the first part of next year. The reason you're not seeing a reduction in SGA is because the way our severance plans are structured in lieu of lump sum payouts, that payout continues to be over time. So as the severance payouts run their course, that's when you'll see the reduction in SG&A segments.

Bill, let me ask you this if I may, too. The El Paso has apparently followed Moody's lead in this situation and has set up, or is proposing to set up a stand-alone subsidiary, collateralized by two joint venture systems, basically zero debt to cover about an almost billion-dollar residual book. Is that something that has any appeal to you? Coke energy is basically on that -- structured along those lines as well.

John, this is Jack. And we've looked at all of the various types of structures, including that one, that El Paso is going into. And have felt that, with our mix of assets and the way we are -- and also because of the types of contracts we have, which are long dated versus what, El Paso's are much more short, that this type of structure really wasn't one that worked for us going forward. Plus, under our current credit agreements, we would have a problem in probably isolating out assets to be able to capitalize, if you will, one of these types of ring fence type operations.

Okay. Let me also ask you this, the feeling down here in Houston is that without mark to market accounting, power trading and the like just doesn't work. It's just too competitive and the like. That's, in essence, what was driving Dynegy, and to a fair degree, El Paso. Can power marketing work for you guys in the future? Without mark to market accounting?

I don't think mark to marketing accounting has anything to do with the business itself. Currently in our credit situation, no, it won't work. We -- until our credit situation is resolved, we're not in a position to be able to offer the products and services we've historically offered to customers. And that's the reason we're pursuing other alternatives. But I will say this about the industry itself, there's a tremendous void that's been formed and I think those companies that do step into the gap will see some extraordinary opportunities.

One final question, if I may, and that is really directed to Andrew. It would be, I think, of great help and comfort if you guys would consider disclosing how much of the trading book is gas versus power or prudent product, as well.

Thank you. We'll take that under advisement for our 10-K disclosures.

Thank you.

Thank you for your attention today.

There are three things that I would like to conclude with. First, legal requirement. Some of the statements which we have made today are forward-looking in nature and they may or may not be realized. Secondly, we are very pleased that our core businesses are performing well, and thirdly, we clearly understand what our priorities are and we are focused on those priorities.

Again, to repeat, those priorities are asset sales, and I think we've made great progress to-date, and we have another closing of Central Pipeline tomorrow. Secondly, resolving the book, and we continue to focus significant efforts to do that. Thirdly, intense management of our cash, and pursuing ways to maximize our cash flow from operations. And then lastly, right-sizing our organization, given the significant assets sales that are ongoing.

With that, appreciate your interest, and we look forward to talking to you next time. Bye.

That does conclude today's telephone conference. Again, thank you for your participation. You may disconnect at this time.